- August 20, 2021 at 7:49 am #632060Syed Ahsan AliMember
- Topics: 111
- Replies: 69
Sir, you said in the lecture on overtrading that if the company is expanding & intends to double in size over the next year that means receivables, inventory & payables will also double in size and due to liquidity problems we will be forced to take the overdraft.
1) Then is it true that if sales are increasing 40% from one year to another; receivables, inventory & payables should also increase by 40% if the company is expanding?
2) When you said overcapitalization means working capital too high which can simply be an indicator (i guess) to identify whether the company is overcapitalizing or not by simply looking at levels of receivables, inventory & payables from one year to another.
And in case with overtrading if the level of working capital is too low which means receivables, inventory & payables are too low.
3) And if the levels of receivables, inventory & payables are not increasing 40% along with the sales then company is inefficient in managing its working capital.
If receivables are less than 40% which means that we haven’t employed enough staff to manage the receivable,
If inventory is less than 40% which means that we have less inventory to sell & we can run out of inventory sooner.
If payables are less than 40% which means that we have a liquidity problem since we are paying suppliers quickly.
4) How would we deal with the indicators in the exam that company is overtrading or not? Can you please help me that how do you think which is causing overtrading?
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